Fund manager Miton (MGR:43p) has rewarded shareholders with a 92 per cent total return including dividends of 2.27p a share since I initiated coverage, at 23p, less than three years ago ('Poised for a profitable recovery', 4 Apr 2015). It’s justified too as I highlighted when I suggested buying the shares, at 38.5p, ahead of this week’s full-year results (‘Exceeding expectations’, 15 Jan 2018).
In fact, having upgraded guidance twice last year, Miton’s management team has posted yet another earnings beat by delivering a 33 per cent increase in pre-tax profit to £6.8m on net revenue up 15 per cent to £21.8m, buoyed by a £918m rise in assets under management (AUM) to £3.82bn. Net inflows accounted for £494m of the rise in AUM, buoyed by robust showings from both Miton’s US and European Opportunities Funds, and its multi-asset fund range. Importantly, the positive momentum has been maintained into the new financial year, with AUM rising to £4.05bn, driven by net inflows of £190m.
The sequence of earnings beats aside – to put this into some perspective, analyst Stuart Duncan at house broker Peel Hunt was predicting 2017 pre-tax profit of £5.4m in January last year – Miton’s operating cash flow of £6.3m was eye-catching. The cash performance enabled the board to repurchase 15.1m shares at a cost of £6m, and declare a 40 per cent hike in the dividend per share to 1.4p at a cost of £2.1m. Miton still retains net funds of £19.9m, a sum worth 11.5p a share.
Moreover, with 87 per cent of its funds in the first or second quartile by performance, it’s reasonable to expect further growth in AUM this year to deliver an accentuated boost in profits given the operational gearing of the business (10 per cent growth in operating expenses in 2017 lagged behind revenue growth). Indeed, Mr Duncan has just raised his 2018 pre-tax profit estimate from £7.3m to £7.7m to produce EPS of 3.8p, up from 3.4p in 2017, and predicts a 20 per cent hike in the payout to 1.7p a share.
On this basis, Miton’s shares are priced on a forward PE ratio of eight net of cash on the balance sheet, and offer a prospective dividend yield of 4 per cent. That represents value in my book and I am raising my target price from 50p to 55p. Buy.
Bloomsbury tales
Shares in Bloomsbury Publishing (BMY:184p), the company best known for publishing JK Rowling’s best-selling Harry Potter books, have run up to the top end of the 140p to 190p trading range that has been in place since the autumn of 2013 much as I had anticipated when I rated them a trading buy, at 164p, last autumn (‘Trading opportunities’, 30 Oct 2017). For good measure, the board has also paid out a half-year dividend of 1.15p a share.
Robust sales in January and February, buoyed by Tom Kerridge’s Lose Weight For Good, which was number one in the UK charts for four consecutive weeks since publication at the end of December, have helped the publisher to post an earnings beat for the 12 months to the end of February 2018. Analyst Malcolm Morgan at brokerage Peel Hunt upgraded his pre-tax profit estimate by 7 per cent to £13m to produce adjusted EPS of 14p, up from 12.6p in 2017. Closing net funds of £25m were £4m higher than Peel Hunt’s forecast, a sum worth 33p a share, and supportive of a further rise in the dividend per share to 7p. On this basis, Bloomsbury’s shares are rated on less than 11 times earnings net of cash on the balance sheet, in line with book value of 185p a share, and offer a 3.8 per cent prospective dividend yield.
Ordinarily, I would suggest banking the trading profit, but as this is a very important year for Harry Potter rights sales, and Mr Malcolm notes that “a small outperformance against expectation could have a noticeable impact on profits”, I would advise holding onto your shares ahead of the next trading update due at the time of the full-year results on Tuesday 22 May 2018. Run profits.
Gama cashed up for bolt-on deals
I had an informative results call with Marwan Khalek, chief executive of Aim-traded Gama Aviation (GMAA:257p), an operator of privately-owned jet aircraft and one that has just delivered a near 25 per cent uplift in full-year underlying pre-tax profit to $17.1m (£12.2m) on revenue (including associates) up by 38 per cent to $615m.
The performance was fuelled by 66 per cent growth in revenue to $388m in its buoyant US air operation, which is reaping the benefits of the fleet joint venture with BBA Aviation (BBA) and delivered a 50 per cent plus hike in operating profit to $9.1m. There should be more upside to come as the US air business “exploits organic market growth and focuses on leveraging the inbuilt opportunity [from the JV]”, one reason why Gama invested heavily in its sales force in the final quarter of 2017, the benefits from which will be seen this year. Divisional operating margins of 2.4 per cent are half Mr Kwalek’s target of 5 per cent and he sees scope for a “one percentage point improvement each year”. That’s worth noting.
As anticipated, a much better margin improvement on the back of cost savings and exiting legacy contracts meant that Gama’s European air division more than doubled operating profit to $4.5m on revenue of $91.8m. The European ground division delivered decent growth, too. Interestingly, Mr Kwalek sees scope to make accretive bolt-on acquisitions for both European businesses and, with $22m funds available from a recent £48m placing, the board has firepower to do so.
Importantly, shareholders are reaping the benefits of almost $14m of free cash flow generated last year as the dividend per share was hiked by almost 6 per cent to 2.75p. Moreover, expect the progressive payout policy to continue as analysts at brokerage WH Ireland predict a 27 per cent increase in Gama’s pre-tax profit to $21.8m this year, rising to $33.1m in 2019. The hefty profit increase reflects both organic growth and contributions from investments made using the placing proceeds which I outlined last month when the shares were around the current level (‘Running the slide rule’, 19 Feb 2018).
Gama’s shares are priced on 12.5 times this year’s likely earnings, dropping to only nine times 2019 EPS estimates, a rating out of sync with the anticipated earnings growth and I maintain my 325p target price. Buy.
PV Crystalox awaits award settlement
Solar wafer maker PV Crystalox Solar (PVCS:21p) has reported a full-year pre-tax profit of €12m (£10.5m) after recognising €20.5m of an arbitration award in a long-running dispute between the company and one of its customers, a leading photovoltaic company that failed to purchase wafers in line with its obligations under a sales contract.
The International Court of Arbitration of the International Chamber of Commerce (ICC) awarded PV Crystalox €36m in November 2017 although the photovoltaic company has the right to receive the outstanding 22.9m wafers under the contract. Discussions are ongoing between the two parties to reach an agreement to eliminate the wafer deliveries for a corresponding reduction in the award, hence the net €20.5m figure recognised by PV Crystalox in its accounts.
In addition, a further €3.1m has since been awarded by the ICC to PV Crystalox and will be recognised in the first half of this year as will interest which is accruing at the rate of €180,000 per month on the arbitration award. Once paid, it will boost PV Crystalox’s net funds to €50.5m, a sum worth 28p a share.
The company remains in cash conservation mode, and ultimately a cash return to shareholders is the end game. But before then the board is seeking a buyer of its German facility willing to develop the silicon wafering operation while exploring the merits of restructuring the business to focus on cutting of non-silicon materials such as glass and quartz.
I rated the shares a hold at 20p ahead of the results (‘Investment company watch’, 12 Feb 2018), and trading on a 25 per cent discount to cash assuming the ICC award is paid, maintain that advice. Hold.
easyHotel cashed up for accelerated roll-out
Budget hotel operator easyHotel (EZH:115p) successfully raised £50m at 110p a share in a placing late last month to accelerate its hotel roll-out programme and has just signed a 25-year lease on a site in Cambridge to develop a purpose built 100-room easyHotel, subject to planning permission. It’s reasonable to expect each room to generate an annual cash profit of £4,000 after rental costs of £6,250 when it opens next year, a hefty return on capital. Expect similar returns for a new 180-room leased hotel in Oxford, too.
easyHotel also has 941 owned hotel rooms in development (fully funded from a £38m placing in October 2016) which will more than double the current 702 owned room stock. Finance director Mark Vieilledent points out that an additional pipeline of 1,112 owned hotel rooms currently under negotiation across eight sites will cost £60m to develop with each room expected to deliver cash profits of between £8,000 and £10,000 at maturity and a return on capital employed of 13 per cent.
I last recommended running profits at 117p (‘Enlightening calls’, 5 Feb 2018), but after factoring in easyHotel’s operational gearing and the value being created from the accelerated development programme, I am upgrading my target price to 140p for the £166m market cap company. My target is based on cash profits rising from £2.3m in 2017 to £11.6m by 2020 on revenues up from £8.4m to £30.5m, as analysts at Investec predict. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies was published on 15 March and can be purchased online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon's second book Stock Picking for Profit can also be purchased online at www.ypdbooks.com for £14.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order.
